5 January 1999 GST/HST Interpretation HQR0001460 - Application of the GST/HST to Custodial Expenses (Investment Advice)

Dear XXXXX

Thank you for your memorandum of October 2, 1998, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of XXXXX[.]

Our understanding of the facts as outlined in your memorandum is as follows:

XXXXX is incorporated and resident in the United States and carries on the business of XXXXX insurance in the United States, Canada and, through subsidiaries, in other jurisdictions. It carries on its insurance business in Canada through a permanent establishment located in Canada (the branch).

XXXXX maintains an XXXXX XXXXX in its corporate office in XXXXX[.] This unit oversaw the branch's investments in international insurance operations, including its share investment in XXXXX international subsidiaries: XXXXX[.]

XXXXX provided investment advice to the branch regarding the branch's equity investments in the above-noted subsidiaries and charged the branch for this service. The purchase of the equity investments in the XXXXX subsidiaries are zero-rated financial services as they were purchased directly from the non-resident issuers in the primary market. The branch does not self assess GST on the imported investment advisory service provided by XXXXX to the extent that it relates to these zero-rated purchases.

The branch's purchase of the equity investment in the XXXXX subsidiary is an exempt financial service since the securities were purchased in the secondary market from XXXXX and not directly from the issuer. The branch does self assess on the imported investment advisory service provided by XXXXX to the extent that it relates to the investment in the XXXXX subsidiary.

An income tax audit disallowed expenses related to the custodial expenses (investment advice) incurred and charged to the Canadian branch as the "expenses were not incurred for purposes of gaining or producing income from business or property from carrying on an insurance business in Canada ..."

Interpretation Requested

You have asked whether custodial expenses (the investment advice) provided by XXXXX and imported by the branch are subject to self assessment of the GST even though the expenses have been disallowed as an expense for purposes of the Income Tax Act (ITA).

Our Comments

Based on the information provided, we are of the opinion that the branch is correctly self assessing the GST on the imported taxable supply of the investment management advice provided by XXXXX to the extent that it relates to the investment in the XXXXX subsidiary.

The fact that the expenses were disallowed for purposes of the ITA does not automatically mean that they are not supplies for GST purposes. It should be noted that for income tax purposes, the definition of "business", contained in subsection 248(1) of the ITA and the extended definition found in section 253 of the ITA, differs from the GST definition found in the Excise Tax Act (ETA). Therefore, a non-resident person considered to be carrying on business for income tax purposes is not necessarily considered to be carrying on business for purposes of the GST. Equally, where it is determined that a non-resident person is carrying on business in Canada for GST purposes, this, in itself, in no way establishes that the non-resident would be considered to be carrying on business in Canada for purposes of the ITA.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Yours truly,

Marilena Guerra
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch